1.Mother and Father own a 2-acre parcel of undeveloped real estate ("Parcel"). Mother and Father are in their late 60s and in good health. They have two children (twins), Son and Daughter, finishing up their final year in graduate school. Son expects to graduate with a master's degree in Geriatrics. Daughter expects to graduate with a master's degree in Hospital Administration. In addition to the real estate, Mother and Father are financially secure and have rental properties and retirement income of approximately $5,000 a month. Mother and Father would like to be in a position to get additional cash flow from rental of the Parcel after it is developed. Son and Daughter have suggested to Mother and Father that they develop the Parcel with a brand new long-term nursing facility. Son and Daughter would assist in managing the construction of the facility and would be the sole managing operators of the nursing home once it opens for business. Assume that Son and Daughter have sufficient funds to enable them to properly capitalize any entity that will operate the nursing home. The Parcel is worth approximately $4 million and it will take another $3 million to build the facility. A bank is willing to loan Mother and Father $3 million against the property to build the facility. Once the facility is built, it is estimated to have a fair market value of at least $9 million. Mother and Father will give Son and Daughter each a 15% interest in the Parcel, including any improvements for their services, but do not want their children to transfer any of their interest without the parent's consent. The entire family has come to Attorney for advice on how to structure the transaction. Assume the following: 1. Attorney had previously prepared Mother and Father's Estate Plan; 2. Mother and Father want to go forward with Son and Daughter's plan but want to make sure that their other assets are protected; 3. The parties expect a tax loss from the nursing home operations for the first year but a substantial net profit for the ensuing years that could fluctuate between $1 -$2 million a year.

A. Which members of the family could Attorney represent in this transaction? Discuss.

B. What type of entity or entities should the family utilize for the construction stage and what changes, if any, should be made once the facility is ready to begin its operations as a nursing home? Please set forth the federal, state, and local tax consequences to all the parties for any entity elected. (Assume that there are no problems in representing the entire family in answering this part of the question.)

C. If the family were to set up a Family Limited Partnership to manage the construction and ultimate ownership of the parcel and improvements, how should Attorney advise the partners to operate and manage the partnership such that it will be accepted for tax purposes (income and estate) upon the death of the parents?

2.Husband and Wife owned 100% of Construction Company, a California corporation engaged in the development of commercial property. Construction Company had a 401(k) plan. Husband was a full time employee of Construction Company and had approximately $300,000 in his 401(k) plan as of December 31, 2003. Wife did not work and has never worked at Construction Company. Husband had a 50% community property interest in the shares of Construction Company and will reach age 70 during 2003.

He had no plans to retire, but would like to meet with Attorney to discuss retirement planning. Construction Company generally employed a minimum of fifty-five (55) workers. Ten (10) of the workers, including Husband, were properly characterized as employees of Construction Company for employment tax purposes at all times. The remaining forty-five (45) workers were construction workers. The IRS recently examined the 2001 Form 1120 U.S. Corporation Income Tax Return of Construction Company and determined that all of the construction workers, who were characterized as independent contractors for federal employment tax purposes, should have been characterized as employees. Construction Company was established in 1970 and had consistently characterized all of its construction workers as independent contractors since the inception of the business. Husband also asked Attorney to meet with him to discuss the Construction Company employment tax case.

He received a Notice of Proposed Adjustments from the IRS examining agent and would like to discuss strategy. Irrespective of the employment tax controversy, Wife wanted to establish a private foundation during 2003. The private foundation would provide support to qualified charitable organizations throughout the community where the family of Wife and Husband had lived for many years. Husband and Wife will have adjusted gross income of $2,000,000 at December 31, 2003. Husband and Wife intended to contribute cash of $500,000 or stock of Construction Company with a value of $500,000 to the newly established private foundation. Husband and Wife had a basis of $2,500 in the shares of stock that would be contributed to the foundation.

A. What advice should Attorney provide to Husband about his 401(k) plan?

B. Discuss the approach Attorney should take to the Construction Company employment tax case.

C. Which asset should be contributed to the private foundation? Discuss.